Chinese PMI Figures Send Mixed Signals on Manufacturing Activity

Official PMI declines to 50.4 in January while HSBC PMI rises to 52.3

Workers on the assembly line of Jinbei cars at a factory in Shenyang, ChinaReuters

China's ongoing economic recovery has picked up steam in January with the HSBC Purchasing Managers' Index (PMI) climbing to a two-year high, in contrast to the modified official index that unexpectedly eased in the same month.

The National Bureau of Statistics said that the PMI declined to 50.4 in January. Economists were expecting an increase to 51.0 in January from 50.6 in December. Any reading above 50 indicates an expansion in the manufacturing activity.

In order to compile the index, the government has increased its sample size to 3,000 from about 800 starting from this year. Therefore, comparing the January result to prior may not be possible. The change in the sample size is expected to have partly affected the weak reading in January.

The official PMI has been above 50 since August 2012, however, its failure to hit 51 indicates that China's expansion in manufacturing activity is only moderate.

The PMI's new orders sub-index inched up to a nine-month high of 51.6, while the purchases quantity sub-index hit a nine-month peak at 53.2. On the other hand, the output sub-index declined to 51.3, new export orders fell to 48.5 and finished goods inventory declined to 47.4.

Despite the worse-than-expected manufacturing activity, economists from ANZ Research expect the country's GDP growth to rebound to above 8 percent in the first quarter on the back of renewed urbanisation drive and fast investment growth in western and central provinces of the country. They also expect China's central bank to maintain its current accommodative monetary policy stance.

"The market liquidity conditions will likely remain relaxed due to capital inflows. Should overheating become a renewed concern later this year, the PBOC may shift its policy stance to tightening," the economists said.

The official data would have limited impact on markets as the PMI is quite an inaccurate barometer around the Chinese New Year holiday due to heavy seasonal adjustments, according to economists at Bank of America Merrill Lynch, who maintained their China GDP growth forecast for 2013 at 8.1 percent.

"We believe the Chinese economy and its related asset markets will remain in a sweet spot in the near term. However, as the street's China GDP growth consensus has been increasingly ratcheted up by exuberant forecasters, investors should be wary of getting too optimistic in coming months," they said.

Meanwhile, China's HSBC final manufacturing PMI has showed better-than-expected reading with the headline number climbing to a two-year high of 52.3, up from 51.5 in December. Economists were expecting a reading of 52.0.

The January index showed output expanding at the quickest pace since March 2011, solid rise in total new orders and purchasing activity rising at the fastest rate in two years.

Notwithstanding its difference with the doubtful official data, the HSBC reading indicates that the Chinese economic recovery continued to gain momentum in January, after the economy started recovering in the fourth quarter of 2012.

"A higher reading of January final manufacturing PMI implies that China's manufacturing activity is gaining further steam on the back of improving domestic conditions. We see increasing signals of a sustained growth recovery in the coming months: the steady investment growth led by infrastructure projects, the improving labour market conditions boosting consumer spending, and the ongoing re-stocking process to lift production growth," said Hongbin Qu an economist at HSBC.

The final reading was higher than HSBC's preliminary January PMI of 51.9. The flash PMI is based on 85 percent to 90 percent of responses to its PMI survey.